Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds

By Sergey Chernenko, Adi Sunderam. Social Science Research Network, 2016

123 citations recorded by the source corpus.

We study liquidity transformation in mutual funds using a novel data set on their cash holdings. To provide investors with claims that are more liquid than the underlying assets, funds engage in substantial liquidity management. Specifically, they hold substantial amounts of cash, which they use to accommodate inflows and outflows rather than transacting in the underlying portfolio assets. This is particularly true for funds with illiquid assets and at times of low market liquidity. We provide evidence suggesting that mutual funds’ cash holdings are not large enough to fully mitigate price impact externalities created by the liquidity transformation they engage in.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/0122db6a71807d6dec1de769048997a337c821ce

Citations in the corpus

• Redemption risk and cash hoarding by asset managers (2017, unknown): “These findings are consistent with the results reported in Jiang et al. (2016) and Chernenko and Sunderam (2016) who examine mutual funds investing in US corporate bonds—bonds which are more liquid than non-US bonds and especially so compared to EME bonds.”
• Financial Fragility in the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond Markets (2020, unknown): “Similarly, there are implications for the way funds manage their liquidity, which is a topic that has been studied before the COVID-19 crisis by Chernenko and Sunderam (2016) , Morris et al. (2017) , and Zeng (2017) .”
• The role of venture capital in the emerging entrepreneurial finance ecosystem: future threats and opportunities (2019, unknown): “Because of their open-ended nature and obligation to meet all the redemption orders coming from the funds’ shareholders, mutual funds should be unable to invest in illiquid securities (Chen, Goldstein, and Jiang 2010; Chernenko and Sunderan 2016; Goldstein, Jiang, and Ng 2017).”
• Investor Flows and Fragility in Corporate Bond Funds (2017, unknown): “The paper by Chernenko and Sunderam (2015) uses this source as well.”
• When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response (2020, unknown): “Theory and evidence for this type of response abound in the literature—Moreira and Savov (2017) for shadow banks, or Chernenko and Sunderam (2016) and Ma, Xiao, and Zeng (2020) for mutual funds, are recent examples—and this idea structures liquidity regulation in practice.”